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tv   Bloomberg Real Yield  Bloomberg  August 12, 2017 10:00am-10:30am EDT

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scarlet: from new york and our bureaus, i am scarlet fu. yield." bloomberg real coming up, joining a course of investors saying the time to reduce risk is now. musk brings his term to the debt market. numbers.s. inflation for janet yellen 221, where does it leave the central bank now? we start with the big issues,
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nerves gripping the market. yield isach for apparent in every asset class. we know the insatiable chase for yield is -- >> we should watch for buoyancy getting to a tipping point towar. >> it doesn't surprise me this has reached into the high-yield market, at the end of the day you have to ask if i'm being holy compensated for the risk. is high-yield or high-quality effort, they have to get to where they can earn in treasuries and as a consul went you have a natural -- in consequence you have a natural buyer for it. >> there comes a point and investors cycles where the return on capital is better than -- more important than the return of capital. >> a lot of the people who got
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it right at the beginning of the rally are saying, this cannot go on forever. scarlet: one of those big names was just good luck -- jeff good lach. this is not the time where you say i can buy anything and not worry about the risk of it, the time to do that was 18 months ago. ofning us now is cohead global high-yield and greg bishop, at rbc wealth management. coming to us from st. louis, head of global fixed income strategy. i want to start everybody with a achrt showing what jeff gundl is talking about. option spreadss and duration, when duration is
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really high, spreads impressing. is the terror we heard of all of those people's versus -- voices, is that justified? is he right to start pulling >> we don't disagree. we have been taking risk down steadily over the past couple of months. we are targeting an underweight to risk assets including high-yield investment grade and emerging markets, but it is nuanced. we don't worry about the current fundamentals. portraits are healthy, leverages high, but not increasing. they spent the last few years extending maturity profile at a low cost to debt. we see low spending and don't expect it to pick up your the question is are you being adequately compensated for the al attila the and -- for the
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volatility and illiquidity. high-yield tends to underperform and we see triggers for volatility to go up. scarlet: maybe it is for that reason, brian, you are underweight and high-yield. how much performance have you had to give up? >> we have been underweight, high yield since early this year, favoring equities for the risk-based assets. i agree with what everyone else has said, high-yield looks expensive, but when everybody inks the same thing, sometimes the opposite happens. asily if everything goes planned, inflation stays low, gdp improves, you can continue to click coupons in the market, but i don't think it's worth the risk you are taking. what is your next plan, light not more or rebuild and high-yield? brian: we have seen a pullback,
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but really nothing on the broader scale. if we sell more meaningful pullback, we would look for and even wait position. what are people worried about when you're looking at duration, what moves at this point? >> it is more of a question as to what are not investors looking at him concerned about? . concerns,garding getting back to comments that have been main, am i getting adequately compensated for the risks i am taking on. in many cases, i think the decision to move into high-yield in search of yield, those decisions are just made blindly, throwing money at the market to get better yields. i think our caution turn to investors is really focusing on .hat you are investing in
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do you know what you are buying, do you know what your position is? we have looked at so many portfolios recently that have last few years have chased high-yield and the investors don't know oftentimes what their total exposure is. it is time to focus on what you on, do you know what you owm? because of length of expansion at this point, when you are talking about the normal sources of risk like central banks, they are going out of their way to say we are not going to move the market, we are going to be slow and deliberate. craig: and we believe that. we believe certainly what the fed is telling us. you need to listen to the fed, because despite concerns about whether market will move in december based on inflation, i think our view is they will. they are talking about a gradual path. clearly the expansion we have
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seen has legs to go. we have seen a recession on the horizon, it is two years down the road at the earliest. looking at the equity markets, there is volatility. we expect correction there, but equities and high-yield have run hand-in-hand. it is time to be cautious here at rachel: we do not disagree that there is funny of time left in the economic cycle, but we do think that the fed will hike at least once probably twice in the next 12 months. we are in what we would term quantitative exit. when we see the fed shrink balance sheets, that will begin to have a technical impact on the market. in particular, we have seen suppressed volatility for the last couple of years. we think volatility will pick up, high-yield correlates with high volatility. i have the chart here.
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it shows a long-term history between volatility and high-yield spreads. in the last weeks, it has picked up a bit. there is a valuation question. concernede really about high-yield when it was really tight, it is a cautious period. scarlet: another chart that has gotten a lot of attention, one that shows how the european high-yield spread have come down. in 2003, the european high-yield thead came in below ten-year yield and it stays that way for about four years. it ended in late 2007. now if you go to the far right of the chart, we are on the cost of the european high-yield spread coming in below the ten-year yield, again. europe, rates will
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lag u.s., see a slower pass of quantitative exit in europe, also you have in the high-yield market, a highly quality market, more of a doubled the market been a single be. it doesn't have the double exposure that has added to u.s. volatility recently. it is only about a three-year duration market. it is keying off different things from the treasury. scarlet: what does that mean for you, how does all the warnings about this credit cycle that we have heard from jeff good luck, -- jeff gunlach, what does that mean for europe? can continuereads to stay relatively low. we are even wait overseas in emerging markets. that said, are you really being compensated for the risk you are taking?
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it is at best a wash. i don't think it is worth putting a lot of chips on the table, so rates should stay relatively low and support that market. ok.let: everyone stick with us. block has the auction a sale of $1.5 billion in bonds causing a stir in the market. we will go over all of it here at this is a bloomberg real yield. ♪
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♪ scarlet: i am scarlet fu. from new york, this is "bloomberg real yield." let's take you to the auction
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block. you had the sale of three-year, 10 year, and 30 year debt your indirect hitters -- indirect onders to the highest share record. on the corporate side, british -- selling at $17.25 billion of bonds your proceeds of the deal will refinance buyout of reynolds american. the debt sale that has everyone talking this week, tesla priced at about 5%. the $1.5 billion sale of senior sheetwill -- it's ballots -- balance sheet as it ramps production. greg bishop and brian rowling from the wells fargo investment institute, since we are talking about high-yield, rachel, let's start with you. in terms of tesla, i know you theot talk about tesla
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company itself, but in general does it reflect a strength in the market or weakness of the market now? are we seeing companies taking advantage of yields while they still can and the central banks raise rates, or is there so much cash anyone can bring anything to market? rachel: we will acknowledge that this is an early stage company that got the big launch of the model three. they are collecting deposits now, but they are using the money to build the capacity to build that car. that is pretty venture like in terms of use of proceeds your i wouldn't call it characteristic of the things we have seen year to date. actually, the backlog of deals in the market is quite light. m&a is running well below the pace. in terms of tesla financing, the thing that jumps out is covenants are pretty challenging
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these days. we are not getting the same protection we did years ago, but that has been the trend. michael: is that what you are seeing as well, people putting more protection into their contracts? >> i would say in general the demand for debt out there is a very strong. i do not see that fading. there have been large debt deals in recent weeks, many times over prescribed. i think that continues, not just over the short term, but over the long term. there are structural issues around the u.s. and the globe that will drive demand for debt and duration. , to pick up on that point, how has the market been able to observe this without so much as a blank? .raig: it is a seller's market
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you can come to market and cut deals, the demand for risk remains strong. global markets are a wash in liquidity. there is money that needs to be put to work, that wants to be put to work. the chase for yield is still out there despite warnings. it is about liquidity and demand remaining strong. i would like to add that -- the seen record new use of proceeds has been largely refinancing pushing maturities further out to the future, actually post financial crisis we have not seen a resurgence of the boom we saw before him, so aggressiveness is not that exceptional and triple c issuance was quite light.
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there is some triple c issuance, but most of it is refinancing. scarlet: things don't look terrible from that perspective. rachel: i have another chart on my screen. 12 months ago we were dealing with energy recession and a group the spike to about 4% across the market. they are now down below 2%, below historic averages your you can see that energy dominates the largest liabilities stacks in the last year, but you have a couple of consumer products company in there as well, pay less and gymboree, an area that is a smaller part of the market. craig, when you look ahead, do you worry about what we're going to see in terms of default rates and does that change how you look at things. you hear people talking about how worried they are right now, are you anticipating a spike?
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greg: we are not. -- craig: we aren't. a gets back to the story about -- the markets have room to run, yet. i think as long as we continue to see this slow and steady growth, you will not see the cup in default or bankruptcies. high-yield equity markets are going to be some order, but it will just into new to drive spreads a little bit tighter. scarlet: talk about the influence we have seen this summer, how has the amount of new money being put to work being changed over the past few months? brian: i think you continue to see investors want to get into the market. i think we are seeing for the first time in the retail investors days, starting to's we investors -- starting to see investors of out of cash, not just in the fixed income markets, but more in the equity markets. that is a little changed from
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anything we have seen over the last six to seven years. scarlet: everyone is sticking with us. let's get a quick market check on where bonds have been this year. looking at the 10, 2, and 30 year, yields are all coming down. still ahead, we have the final spread. the week ahead features the minute from the fomc. this is "bloomberg real yield."
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scarlet: i am scarlet fu. this is "bloomberg real yield." time for the final spread. coming up you have u.s. at retail sales, nafta discussions, missile defense talks in washington, as well as minutes
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from the fomc. we were just talking about whether assets are overvalued. the federal reserve of minneapolis bank president speaking out and he says no asset class is lashing red to him. our view is we are comfortable and confident with the rescue from the great recession as well as managing recovery going forward. , withg up at the fomc regard to the balance sheet, we don't see a repeat of the tantrum. michael: i want to take you guys into the short end of the market spread8582, this is the between yields and the last time we had a debt ceiling problem we
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saw a spike below zero for that spread. we are not quite there yet, but you can see us moving down here let's start with brian. are you concerned that we will have something happen in the debt ailing debate that will cause the markets to react significantly? brian: no. i think the debt ceiling plays out as it has most of the other times. we go to the last minutes and they will eventually pass it. it will cause market concerns, but it will pass and play out -- i just don't see -- they don't have any other choice than to pass it. rachel, is that too much complacency? i'm not sure you call it complacency, we do expect volatility to pick up, but we do think everyone senses the importance of clearing the debt ceiling. it will happen, but it will be
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last minute and there will be a flurry of a volatility before hand. scarlet: what will volatility look like before this one like the last debt ceiling debate? certainly the policy coming out of washington right now, and who is leading the way, i think that will create the volatility your we went to the t-bill market, if you look at late september into early october, you pick up 10 basis points already. there is some volatility playing out in that market. we thank ryan mcconnell and the white house are all on board running to get a clean bill passed. an uptick in volatility should be modest. youael: brian, quickly could have the fed starting balance sheet reduction at the same time. does that were you to have two competing elements? no.n: i'm not worried about the balance sheet reduction affect
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in the market. if you look at the fed's maturity schedule, they actually billionr 200 extra maturing securities this year then last year your they will be buying more this year than last year even though they started reducing the balance sheet. scarlet: does that mean nobody is worried about the balance sheet reduction. would not be reason to worry? you are right to play the contrarian here, but i think what is different than 2013 and the taper tantrum is so careful andn cautious explaining what they want to do. i think that has helped pave the way for a reduction in volatility. scarlet: first question to rachel, what will we be talking about in five years time, quantitative easing or quantitative exit? rachel: probably be back on that
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using side of it, because i do think there will be a cycle between now and then. craig: i think we will be talking about interest rates, lower for longer. .raig: easing michael: terminal rates are overpriced, 2% says they are overpriced, 4% says they are ok. closer to two or four? 2%.el: brian: four. scarlet: they get so much for joining us. this is bloomberg. ♪ ♪
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